Canadian Dollar Weakens as Central Bank Says Rate Appropriate

By Ari Altstedter and Taylor Tepper -
Mar 6, 2013

The Canadian dollar approached its
weakest point in eight months against its U.S. counterpart after
the Bank of Canada indicated it won’t raise interest rates
anytime soon with inflation slowing more than expected.

The currency declined as central-bank Governor Mark Carney
softened language about tighter policy for the second meeting in
a row, saying inflation will “remain low in the near term” in
an economy with “material excess capacity.” Carney retained
the warning rates will rise over time amid speculation it would
be dropped entirely. The central bank kept its benchmark rate at
1 percent.

“After the Bank of Canada seemed to push out interest rate
hikes further into the future, and took one more step towards a
neutral as opposed to a hawkish stance, that weighed on the
Canadian dollar,” Camilla Sutton, head of currency strategy at
Bank of Nova Scotia (BNS), said by phone from Toronto. “It’s most
likely to weaken, just kind of drift lower, as the market
digests what’s occurred over the last month.”

The loonie, as the Canadian dollar is known for the image
of the waterfowl on the C$1 coin, fell 0.5 percent to C$1.0320
per U.S. dollar at 5 p.m. in Toronto after earlier declining 0.7
percent. It touched C$1.0342 on March 1, the weakest since June
28. One Canadian dollar buys 96.90 U.S. cents.

‘Modest Withdrawal’

Carney has warned in every policy decision since April that
rates could rise, today reiterating that his eventual next move
will probably be an increase. That makes him the lone Group of
Seven central banker who has indicated he might raise interest
rates, while the U.S. Federal Reserve and Bank of England are
buying bonds to hold down yields to boost growth with policy
rates close to zero.

“The considerable monetary-policy stimulus currently in
place will likely remain appropriate for a period of time, after
which some modest withdrawal will likely be required,” policy
makers led by Carney, 47, said in a statement from Ottawa today.

The shifting guidance on rate increases has sparked a
squeeze in the supply of shorter dated bonds, forcing the
central bank to make the longest string of loans from its own
inventory since the onset of the financial crisis.

The Bank of Canada has loaned securities on 10 of the last
11 days to ease the shortage as demand from traders unwinding
bets on a rate increase this year pushed rates for repurchase
agreements on two- and five-year government securities to almost
zero.

Record Bets

Speculation the Bank of Canada would drop its bias to raise
rates prompted hedge fund to amass record bets against the
Canadian dollar, data from the U.S. Commodity Futures Trading
Commission show.

Futures contracts wagering on a decline in the Canadian
dollar versus its U.S. counterpart held by so-called leveraged
funds totaled C$6.3 billion ($6.1 billion) in the week ended
Feb. 26, according to Citigroup Inc., citing CFTC data.

“There is still the slightest bias toward higher rates,
but it’s a microscopic bias,” Adam Button, currency analyst at
Forexlive.com in Montreal, said by phone. “There is no reason
to expect a rate hike this year. A rate hike in 2013 is
extraordinarily unlikely.”

The government statistics agency publishes February
employment data on March 8, with economists predicting the
jobless rate will rise to 7.1 percent from 7 percent.

‘Less Imminent’

GDP grew at a 0.6 percent annualized pace from October to
December, the slowest since the second quarter of 2011 and less
than Carney’s Jan. 24 projection of a 1 percent expansion rate.
Signs that the world’s 11th-largest economy is struggling to
reach full output led Carney to say that an increase in his
benchmark rate is “less imminent.”

The GDP report came after economic data on housing starts,
employment growth, factory sales, inflation and retail sales all
fell short of economists’ median forecasts this year.

“We should see some of the data begin to turn a little
more positively,” David Tulk, chief macro strategist at
Toronto-Dominon Bank’s TD Securities unit, said by phone from
Toronto. “The Canadian dollar could move a little bit higher if
we start to see that run in the data.”